While the specifics over how it will be achieved are as yet unknown, and there are already signs that some members are uncomfortable with the decision, it appears that OPEC will reduce oil output for the first time in eight years when the group next meets on November 30 in Vienna.
The tentative agreement to cut output by 750,000 barrels per day to 32.5 million barrels — the figure the group believes will be required to balance the crude market next year — had an immediate and outsized market impact as soon as the headlines hit, sending both Brent and WTI crude futures higher by around 5% within a matter of minutes.
There is now real optimism that the lows stuck earlier this year for crude will be just that, the lows in the current price cycle.
While undoubtedly a bullish development for prices, presuming, of course, that the deal is actually finalised, there is one small problem. While OPEC is an influential and enormous part of the crude market, it actually only produces around 40% of global supply. There’s other major players to consider, including the US and Russia.
As we’ve all learnt in recent years, it’s hard enough to get OPEC members to agree, let alone other competitors in the market.
And higher prices, as is likely to eventuate should the OPEC deal be formally approved, will make it all the more appealing to non-OPEC producers to keep pumping to capitalise on higher prices.
Oil producers want increased revenues, as do investors. And then there are cash-strapped governments to consider.
Vivek Dhar, a mining and energy commodities analyst at the Commonwealth Bank, touched upon the conundrum facing the global crude market in the wake of OPEC’s decision, suggesting that the benefits of higher prices to OPEC could be easily unwound by the actions of other producers in a research note released early Thursday.
“While the details and the enforcement of the [OPEC] deal are still unknowns, the implications for US supply is well worth considering,” says Dhar.
“US data suggests that oil prices around $US50 per barrel are encouraging the restart of idled US oil output. While OPEC may be finally working as a group, the response of US shale oil producers to increase output to any price increase may undo OPEC’s plan.”
Dhar notes that even before Wednesday’s announcement, there were tentative signs that US crude output, having fallen steadily in the past two years, was starting to bottom out, hinting that even with lower crude prices, efficiency gains were allowing many previously uneconomic producers to be profitable at current levels.
“After months of projecting sliding US oil output until 3Q17, the US Energy Information Administration (EIA) has finally changed their tune,” he said.
“The EIA now forecasts that US oil output will lift from 8.49 mb/d in 3Q16 to 8.57 mb/d 4Q16, up from previous forecasts. The uptick likely reflects the increase in US oil rigs, which have advanced 32% (100 rigs) since late May.”
Remembering, of course, that the increase in rigs in production occurred when WTI crude futures traded in a range of between $US39 to $US52 per barrel.
One can only speculate as to the degree US production would lift should crude prices move back above $US50 per barrel.
Dhar believes this, along with speculation over whether the OPEC deal will actually get over the line, will see volatility in the crude price intensify in the months ahead.
“We expect oil price volatility to accelerate into year end on continuing speculation on OPEC and US oil supply,” he says.
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